3 Paradigm Shifts that will Drive Competitive Advantage in the 21st Century

by Greg Satell

J.P. Morgan believed in trusts. It seemed to him that excessive competition diminished profits and undermined capital formation, which he saw as essential to building a modern economy. Although that may seem like a strange point of view today, it was one widely held by 19th century industrialists.

That view became an anathema in the 20th century as the focus of business shifted to competing effectively. Men like Alfred Sloan, Peter Drucker and, eventually, Michael Porter came up with important ideas about how to run a business more efficiently and create a sustainable competitive advantage.

Today, however, efficiency will only get you so far. Three of the world’s five most valuable companies are not old line industrial or financial companies, but fast moving tech companies who prosper through agility rather than efficiency. Much like the 20th century industrialists, today’s managers need to adapt to new rules. Here are three trends you need to know.

1. From Leveraging Assets to Accessing Ecosystems

The industrial age was driven by ownership of capital assets. To build a significant business and achieve economies of scale, you needed to control the means to produce, such as plant, equipment and financing to maintain inventories. The need for these things created effective barriers to entry in most most industries. Bigger really was better.

In a famous 1937 paper, Nobel prizewinning economist Ronald Coase showed that larger firms could become more efficient by reducing transaction costs, especially informational costs. Larger scale enabled you to have more resources on hand and deploy them quickly, without having to locate and procure the assets when you needed them.

Yet today, digital technology has reduced transaction costs dramatically. Anybody with an idea can wake up in the morning, design a product on free online CAD software, make a cheap prototype on a 3D printer, crowdfinance it on Kickstarter and manufacture it using a service like Ponoko. If you need help along the way, you can hire a freelancer at Upwork.

So instead of being able to leverage capital assets to keep upstarts at bay, managers must weigh investments that increase efficiency against the danger that they will reduce agility. We’ve moved from the scale economy to the access economy.

2. The New Power of Platforms

The killer app of the industrial age was bureaucracy. As Max Weber explained in the early 20th century, the increased scale brought on by mass production required a more rational form of organization. Jobs and procedures were standardized and managed through a system of hierarchy, authority and responsibility.

But now, the power of any bureaucracy is dwarfed by the ecosystems it needs to access. Take Apple for example. As a bureaucracy, it is a sprawling behemoth with 110,000 employees, but that number is dwarfed by the 300,000 developers on its App Store. Even IBM, once the poster child for proprietary control, has embraced open technology platforms.

And lest you think that networks are only important in cyberspace, consider the case of Ford. During the recent financial crisis, the company lobbied hard for the government to bail out its rivals. This wasn’t an act of altruism, but survival. If GM and Chrysler went down, so would the supplier networks upon which Ford depended.

The inescapable reality is that power is shifting from corporations to platforms, because platforms are how we access ecosystems of technology, talent and information and that dramatically changes how we need to compete. Whereas before we operated by command and control, now we need to build, manage and widen networks of connections.

3. From the Knowledge Economy to the Collaboration Economy

By the mid-20th century, the economy began a shift from manufacturing to services and workers were employed for their expertise as much as for their labor. Even in manufacturing, which retained many of its low-skilled workers, firms were increasingly hiring researchers, engineers and designers to invent new products and improve processes.

Peter Drucker called this the shift to a knowledge society. Firms began investing heavily in corporate labs and universities, while also ramping up their HR departments to recruit and retain the “best and the brightest.” By the end of the century, McKinsey declared a war for talent, arguing that getting the right people was even more important than “capital, strategy, or R&D.”

Yet in his new book, Humans Are Underrated, long time Fortune columnist Geoff Colvin points out that as knowledge tasks are increasingly being automated, social skills are trumping cognitive skills and calls for a shift in emphasis from “knowledge workers” to “relationship workers.”

Today, a teenager with a smartphone has more access to knowledge than even a highly trained professional at a major institution a generation ago. So the crucial skill today is to be able to do things machines cannot, namely work effectively with humans. That’s why the ability to collaborate, with humans as well as machines, is becoming the new competitive advantage.

The Tony Soprano Problem

In the famous TV show, The Sopranos, mafia boss Tony Soprano ruled his crew with an iron hand. Sensing that there might be more to life than murder and extortion, he often sought out advice from his therapist, Dr. Jennifer Melfi. But after listening to her advice on taking a more collaborative approach, he asked, “But then how do I get people to do what I want?”

Most executives today have some version of the Tony Soprano problem. Many are acutely aware of the transformative power of platforms and ecosystems, but in the course of everyday operations, they need to get people to execute according to plans—in effect to do what they want them to.

Yet we can’t go on as if nothing has changed. Even Apple, arguably the most powerful corporation—or organization of any kind for that matter—cannot dictate orders to the legions of developers on its app store, any more than a company like Ford can control the supply chain upon which it depends for survival.

We can no longer rely on controlling and leveraging assets, but now must take into account new sources of power, which reside not at the top of hierarchies, but at the center of networks.

image credit: fool.com

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Greg Satell is a US based business consultant. You can find his blog at Digital Tonto and you can follow him on Twitter.

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